San José, Costa Rica, since 1956

Arbitration Case Resonates Here

The first international arbitration case under the Central American Free-Trade Agreement with the United States (CAFTA), in which a U.S. railroad company is accusing the Guatemalan government of a “culture of corruption and denial,” is sending ripples through Costa Rica, the only CAFTA country yet to vote on the pact.

The controversial U.S. trade agreement, meant to foster trade by reducing tariffs on imports and exports, creates an international arbitration panel that puts multinational companies and CAFTA nation-states on the same playing field, legally speaking.

In Costa Rica, CAFTA opponents are saying the arbitration panel encroaches upon Costa Rica’s sovereignty and is unconstitutional, while supporters say it gives investors the security of knowing they’ll have the right to speedy resolution of their conflicts in a foreign country.

“The sovereignty question regarding these trade agreements is not dead. They give parity between the corporation and the country… (and governments) cannot make broad decisions affecting public policy,” said Larry Birns, director of the Washington, D.C.-based think tank Council on Hemispheric Affairs.

The subject of investors’ rights is no moot point in a country where the CAFTA discussion – which has been the cause for passionate street protests, grass-roots movements and hardball politicking – has become a heated debate over what kind of developmental model Costa Rica should follow.

In recent years, Costa Rica has been bombarded with private investment, and Costa Rican institutions have proven too bureaucratic, cash-strapped and toothless to impose the rule of law. Recent and ongoing land and beachfront property scandals have laid bare Costa Rica’s developmental crisis (TT,March 19).

Though this week saw the first arbitration case filed under CAFTA, more than 40 cases have been filed for a total of $28 billion in claims under the North American Free-Trade Agreement (NAFTA), a 13-year-old pact among the United States, Canada and Mexico. So far, U.S. investors have walked away with $35 million from the Canadian and Mexican governments in five of 11 cases concluded, according to a report by Public Citizen’s Global Trade Watch, a Washington, D.C.-based policy group founded by U.S. environmentalist and consumer rights advocate Ralph Nader.

“They want to bring in private interests sheltered by CAFTA,” said Costa Rican legislator Alberto Salom, with the opposition Citizen Action Party (PAC), who called the pact’s investment chapter unconstitutional and a violation of national sovereignty.

Salom’s request for the assembly’s legal department to review how many votes the trade pact needs for approval here set off a political uproar this week, when the department’s outspoken director, former legislator Gloria Valerín, determined that a qualified majority of 38 votes is needed,more than the 29 mentioned in a similar report last year.

A main focus of Valerín’s report is Chapter 10 of the trade pact, which lays out the legal framework for the international arbitrage court.

What Makes a Majority?

When Valerín’s assistant opened the door last week so the legal director could explain her conclusion, a herd of reporters and cameramen flooded in like a dam had been broken.

Valerín’s recommendation rattled Congress, setting off a wave of impromptu press conferences from CAFTA opponents, then the assembly’s president, then Valerín herself.

“If they want to fool around and act like this isn’t binding, we’ll bring in the Sala IV,” Salom said in a conference March 15 with other anti-CAFTA legislators.

Immediately after that conference, pro-CAFTA assembly president Francisco Pacheco, of the ruling National Liberation Party (PLN), left the assembly floor discussion to comment on Valerín’s recommendation, which he called non-binding and “artificial.” He said it contained political, not technical, conclusions.

Valerín is a former Social Christian Unity Party (PUSC) legislator who has been on the anti-CAFTA wagon and has recently forged friendships with PAC legislators such as Salom and party leader Elizabeth Fonseca. However, she told The Tico Times, she’s party neutral.

Pacheco referred back to a report by the same department last year that called for only 29 votes, a simple majority.

Valerín brushed off Pacheco’s comments. “Diay, it’s in the Constitution, what am I going to do about it?” she said, throwing up her hands in front of a wall of reporters crammed into her office.

The number of votes needed to ratify CAFTA has become increasingly important in recent weeks as legislators from the 38-member pro-CAFTA bloc have come under fire for alleged conflicts of interest, prompting one legislator to step down from a commission on telecom reform required by CAFTA, and another legislator becoming the subject of a Government Attorney’s Office investigation regarding her potential conflicts (TT,March 19).

The debate was complicated this week when PAC’s Ronald Solís said at the conference that the far-reaching trade agreement might even require 43 votes to pass.

Pacheco said he remains confident that regardless of the new recommendation, CAFTA has the support of “at least” 38 of the 57 legislators in Costa Rica’s unicameral Congress.

Valerín’s report says the trade agreement is plagued by “excessive ambiguity” and should be sent back to the Executive Branch for a “more precise and clear” translation.

It argues that Chapter 10 is one of at least four chapters that suggest CAFTA’s passage would require changes to the Constitution or legal reforms that would require 38 votes.

Her report says approving CAFTA is tantamount to transferring the state’s judicial powers to “a communal legal process” for “regional and communal” objectives, which according to a recent Constitutional Chamber of the Supreme Court (Sala IV) ruling, requires 38 votes.

Mario García, the former department director who released a conflicting report in April of last year that called for only 29 votes, said his report “speaks for itself.”

García, who is now the department’s research director, called Valerín’s recommendation “respectable” but declined to comment further. He said the report he conducted was consulted by a multiparty base of aides and experts inside and outside of the assembly.

“Are 20 lawyers going to be wrong?” he asked.

Costa Rica is the only CAFTA signatory that has not ratified the pact.

Illegal Expropriation?

Valerín’s report came the same week an international arbitration case between a U.S. railroad company and the Guatemalan government blew up.

On March 13, the U.S. company Railroad Development Corporation (RDC) filed a notice of intent against the Republic of Guatemala under CAFTA for an alleged “indirect expropriation.”

The Pittsburgh-based company said in a statement that it had won a 50-year concession to reopen and operate 500 miles of Guatemalan railroads that link Guatemala City to the Atlantic coast, Mexico to the north and El Salvador to the west.

In August 2006, following the effective date of CAFTA, the government of Guatemala issued a presidential decree declaring the privatization of the national railway system “lesivo,” meaning against the interests of the state.

The company claims it has since suffered losses and has been unable to obtain credit, lease facilities and find clients. It filed its case alleging “wrongful expropriation” and is seeking $65 million in damages under CAFTA’s Chapter 10, which prohibits expropriations without payment.

“Another blow will be struck for the rule of law in Guatemala when the government’s lesivo declaration is forced to withstand the scrutiny of international standards of fairness and protection,” said the company’s lawyer Regina Vargo. Vargo’s defending the company raised some eyebrows, since she negotiated CAFTA for the U. S. government.

In Costa Rica, news of the case was spread by CAFTA opponents and unions, prompting Foreign Trade Minister Marco Vinicio Ruiz to publicly defend the trade pact. He said it establishes “clear rules that ensure an eventual arbitrage, guaranteeing both parties a due process and right to defend themselves.

“This legal resource doesn’t limit the investor’s option to seek out a legal process at the national level,” he said in a statement two days after the papers were filed.

In its case, the Railroad Development Corporation also requested an injunction from the country’s high court, alleging the state failed to meet its concession contract.

Resolving Disputes

Chapter 10 provides rules and security for investors, but most of all, CAFTA supporters say, it speeds up what often turn out to be slow or costly judicial processes and guarantees a decision in a matter of months, not years.

Whitney Witteman, director of the economic section of the U.S. Embassy in San José, said that by lowering barriers to trade, CAFTA will bring lower consumer prices, job creation and increased foreign investment.

The CAFTA text calls for international disputes to be resolved within clear timeframes. Companies can file civil cases against countries, and vice versa. Once a case has been filed, each side of the dispute picks an arbitrator and the two arbitrators decide together on a third arbitrator. The panel of three judges hears both sides within a certain timeframe and makes one binding decision that cannot be appealed.

A key article in the chapter says each country has the right to ensure “investment activity in its territory is undertaken in a manner sensitive to environmental concerns,” according to the English version of the pact.

Witteman said the panel actually lessens the burden on the state that would normally be responsible for processing such litigation.

He said every free-trade agreement the United States has signed includes a section on investment rules, and currently, many businesses already are engaged in the practice of writing arbitration clauses into their contracts.

Ambassador Speaks Out

President Oscar Arias met with U.S. Ambassador to Costa Rica Mark Langdale last week to explain what his government is doing to get the long-discussed trade pact approved by the Legislative Assembly.

The National Liberation Party (PLN), which brought Arias to power and whose 25 legislators make up the largest assembly faction, hopes CAFTA will reach a vote within five months.

Liberation legislators are still working to pass a fast-track measure that would allow legislative leaders to restrict discussion of CAFTA to between 22-28 sessions, meaning three to seven weeks depending on whether four or eight sessions are held per week (TT, March 2).

The fast-track measure already passed once, but the Constitutional Chamber of the Supreme Court (Sala IV) recently ruled that the assembly had violated its own procedures in processing it and must fix those errors before continuing.

“Now it is the time for Costa Rica to make a decision, if it wants to participate in the global market like the rest of the region,” Langdale said after meeting with Arias.

The meeting drew fire from CAFTA opponents the likes of Broad Front Legislator José Merino, who accused Langdale of “interference” in national affairs and blasted President Arias for allegedly being accountable to the northern trade giant before his own citizens.


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